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Hairy palms and letters to the editor

I haven’t been posting on Troppo much lately, mostly because I’m pretty fully occupied establishing with partners a new private legal practice in Darwin, Melbourne and Adelaide by early January.

However I haven’t been able to restrain myself from indulging in the first sign of madness, namely writing letters to the editor of the local Northern Territory News. They mostly seek to debunk its current lowest common denominator populist crusade against the entirely responsible economic policies of the new Mills CLP government. The NT News currently sees itself as the propaganda arm of the ousted Labor regime, which is rather bizarre given the biases of the Murdoch press elsewhere in Australia. Unfortunately the editor didn’t see fit to publish my last effort, and he probably won’t publish this one either, so I’ll post it here instead:

Dear Sir

Although there are valid concerns about some individual spending cuts announced in the Mills CLP government’s mini-budget, its overall direction and settings are in my view modest, responsible and appropriate. As many would know, I am anything but an uncritical CLP apologist.

The NT News editorial of Thursday December 6 quotes the expected debt to revenue ratio in 2016 as being 73%, and notes that a widely accepted measure of a healthy economy has that ratio at 60%.11. KP: The figures I’m using are non-financial public sector debt, which includes GBEs like Power and Water and NT Land Corporation. This figure is the one generally used by the World Bank and OECD in comparing countries’ comparative levels of indebtedness. It’s even more apposite to use that measure when examining the NT’s fiscal position, given that the Henderson Labor government was massively subsidising PAWA from recurrent revenue in order to keep power charges artificially low for electoral purposes. [↩] However, what the editorial fails to explain is that even this less than healthy 73% figure is achieved only AFTER factoring in the effects of the CLP government’s mini-budget measures. Had the government not acted, that ratio would have stood at 100% of revenue (see 2012 Budget Paper No. 2 Table 2.10, page 27 and CLP mini-budget at pages 100-101) which is significantly in excess of the worst NT budget position reached in the 1990s in the wake of Paul Keating’s “recession we had to have”. That is still a fraction of the debt levels of basket cases like Greece and Spain, but it is worrying just the same and certainly required prompt corrective action.

It simply isn’t true that the NT government would get away with returning the budget to surplus over a leisurely 10 years as your editorial suggests. The NT gets 80% of its funding from the Commonwealth, most of it from GST revenue generated across the nation. The rest of Australia would not sit idly by while the NT blithely continued running up debts on the “Visa Card” while others are paying the interest bill. Just about all other states and territories already have programs to return their own budgets to surplus by 2014.

Even after the CLP’s mini-budget measures the NT will still have a budget deficit of just under $60 million in 2016. However, had the government not acted, the annual deficit would have stood at around $250 million in 2016 on the Henderson government’s own figures22. KP: In fact according to the Pre-Election Financial Outlook the projected deficit in 2015-16 was actually $475 million. The CLP’s mini-budget reduces that to a modest $53 million. [↩]. In other words, far from being extreme or excessive, the mini-budget measures are responsible and gradual. Your attempted comparison with the “ultra-conservative” ideologues of Queensland actually emphasises that fact. The Newman government’s recent cuts to the Queensland public sector amounted to about 6.8% of total employee numbers, while the Mills government’s mini-budget cuts are less than half that at just 3%.

Regards

I should make a few additional points for non-NT readers:

I acknowledge that long term public debt is not bad per se, at least when employed to build necessary productive infrastructure. Moreover, around $1.2 billion of the previously projected $5.2 5.6 billion dollars net debt WAS for long-neglected power and water infrastructure. However the previous Labor government was also subsidising everyone’s power bills from recurrent funding to the tune of almost $1000 per household per year, a strategy explained wholly by short term electoral considerations and not at all by sound economic management.

Nevertheless, had it been in government and facing a close election the CLP would probably have done likewise.

Similarly, had it survived the recent NT election, Labor would certainly have emulated the CLP and immediately hiked power charges by 30% as the CLP has just done. We know this because of a leaked letter from former ALP Treasurer (and now Opposition Leader) Delia Lawrie, which assured PAWA that it would bring power charges up to more “commercial” levels after the election.

The NT News has been simultaneously creating the impression that there’s no need at all for the sorts of cuts the CLP government is making, while conceding in the next breath that maybe they are necessary but should be done much more gradually. It’s certainly true that there’s no reason in strictly economic terms why power charges could not have been increased by 10% per year for 3 years rather than in a single fell swoop. But there’s a very good political reason. No government hoping to retain power would increase electricity charges in the run-up to an election. Politics 101 says that a new government should do the fiscal “heavy lifting” in the first year of its term and then aim at good news budgets leading into the election. Again the ALP would have done likewise had it retained government, although it would not have had the CLP’s luxury of blaming its predecessors for the problem.

On current economic data the NT economy is very healthy, if not quite in boom times. Now is certainly the time to do the “heavy lifting” of moving the budget back towards surplus. However economic management remains quite a tricky judgment nonetheless. On one hand, the huge Inpex gas project is pumping money into the local economy, the housing market is fairly strong and unemployment is low. But we have a tiny, narrowly-based economy. The critical tourist market is very flat (mostly because of the high Australian dollar) and several mooted mining projects have been cancelled due to falling mineral prices. Operations at Ranger uranium mine have been wound back and the future of the huge bauxite mine at Nhulunbuy is in question. The Territory’s economy is much more heavily based on public sector expenditure than any part of Australia except the ACT. There is a real risk that excessively tight fiscal settings could push the economy into recession if they’re not careful, particularly if the Euro-crisis and/or the US “fiscal cliff” end badly. Fortunately, and unlike the Gillard government federally, the CLP has not backed itself into a rhetorical corner by promising a short-term local surplus come what may.

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About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.

The fundamental problem with the cyclic Keynesian theory is that government finds it so much easier to spend money than to do the “heavy lifting” of saving money. What’s more, no one can prove where we sit in the “business cycle” anyhow (except to go back retrospectively), so it is largely a matter for opinion. If we all knew the answer for sure then we wouldn’t have cycles in the first place.

That’s the Keynesian theory… but Keynesian practice is much easier: spend now and promise to save later.

Your first point sound more like a complaint against government in general, not Keynesian theory. The political pressure to spend would exist even if the government tried to follow a ‘balanced budgets all the time’ theory.

As for your comments on the business cycle, it seems pretty clear when the media go on and on about being in a recession or when politicians are talking about ‘the recession we had to have’ that the economy might be in recession. Surely the central banks around the world aren’t just making it all up.

But if we weren’t encumbered with Keynesian theory, we could establish some sort on institutional system that constrained ALL government spending regardless of the flavour of that government.

Once people accepted the system, the pressure would be off politicians to give away goodies to special interest groups, allowing them to make the more important decisions regarding trade-offs and delivering good governance, making laws we can understand that aren’t too onerous, and defending the nation (which is after all the main reason the Federal Government exists in the first place).

If you know we are in a recession, then why not just invest all your money (and all you can borrow) and put it into something counter-cyclic that is guaranteed to pay back big time when the inevitable following boom comes along? When you become ridiculously wealthy you can throw some loose change into an advertising campaign to tell the world how stupid I am.

You seem to have things backwards. We should be basing our politics on the mainstream economic theories supported by evidence. Not basing our economic theories based on what would be convenient for establishing some idealised political system. That’s besides the point that it’d be just as practically possible to set up an independent fiscal authority based on Keynesian economics as with any other economic theory. Either way it’d be politically unlikely and somewhat undemocratic to take away the tax and spending powers from the parliament.

It’s also important to realise the government is already making those trade off decisions. You just seem to want to exclude any trade off involving debt or deficit despite these being important options for managing an economy. What we need is a political opposition and media willing to provide rational criticism of any budget rather than one that focuses on generating headlines and sound bites in their favour. It’s funny you talk about how hard it is for the government to not spend money when the government is under so much political pressure to have a surplus.

There’s a difference between knowing the economy is in recession and knowing when it’s going to start growing again. There’s the saying that markets can remain irrational longer than you can remain solvent. It’s governments (at least those that have their own currency) that have the financial security to manage budgets and debt over a sufficiently long time period that the uncertainty over the depth and duration of the recession is not an insurmountable issue. There’s also a difference between investing to gain a direct return and managing aggregate demand with indirect recovery through (comparatively) higher tax revenues.

While I am almost angry with the NT News about misrepresenting the situation, almost everyone gleefully retails a story of just how bad things are going to get – after Christmas. I listen with utter delight and reply with relish. The ‘News’ has us all on the same page. We are united by dreadful conversations over the shop counter, at morning tea and at Friday drinks. We are a community busily chewing over a PAWA armageddon, that we all deeply suspect will never come and that is what makes it so satisfying. Like a disaster movie – we’ll all walk out of the cinema alive and much the same.

The CLP had to make cuts but it’s entirely legitimate that the media hold them to account for where they’ve chosen to make them, and where they’ve chosen to spend. We did not need a “renewal management board” stacked with obscenely overpaid CLP cronies to give the government advice that the Treasury already had. Similarly there are a lot of CLP hacks employed in ministerial offices on the fifth floor for silly money.

Mills shouldn’t have campaigned on keeping the cost of living low when he must have known this was coming. This is a bigger lie than any “no carbon tax” lie his side of politics likes to remind us of.

A nitpick — a single big jump of 30% is not the same as a 10% rise (on the 2012 base) per year. The jump yields a lot more revenue over the same period because more money is being collected, sooner.

As for the housing market, that to me is the key “cost of living” problem for Darwin in particular and the NT in general. Power, petrol and food have always been very high and I expect that consumer inflation in the NT is tracking inflation elsewhere.

But rents and mortgage payments are squeezing out other payments and creating enormous, disconnected inflationary pressure. Demand isn’t going away, so supply has to ease. That means faster land release and higher density.

Agree re rent etc but I don’t think the price of houses is very different from Sydney or Melbourne, but you do have to be happy living in the overheated bogan capital of Oz.
And many folk are.
Just tonight on Stateline there was an inordinately long story that tracked the predilections of various post cyclone residents who were simultaneously mourning the way Darwin was and content to live in the Darwin that is.
Me? I feel as if someone has boiled my head. A low of 29!

The problem is not so much land release in Darwin at the moment, rather it is that in order to develop the released land one needs power, water, roads, telecommunications, and drainage. For that, one needs engineers, surveyors, drafters, trades people, and general laborers. All of whom can get much more money working for Inpex, or FIFO to wherever.

That, of course, means that there is less housing for said engineers, surveyors etc etc, which means there is a shortage, which means that they get an even better salary.

That is not going to change any time soon, because while the government leases the land, it is the private sector that develops. The private sector does not do any development when times are hard, and then yells and moans in the busy times when it is competing with Inpex (or Conoco Philips or whoever) for workers.

There is an argument for doing some of this work countercyclical to the business cycle, but the private sector is not going to do it. Back to Ken’s point imo. OTOH, as a resident of Darwin who is able to work for a labour hire firm by the hour at an outrageous rate during the dry, and be an idle loafing refugee in Adelaide during the wet, I have a vested interest in there being no change. Carn the private sector, and boo the Keynesian countercyclists I say!

Cost of labour makes it more expensive to release land, but that doesn’t change that you must first … release land.

I saw no shortage of tradies working on various capital works for the NTG and its contractors. Plenty of builders on sites around the city.

What I also saw was that Gerry Wood stopped the expansion of Palmerston dead, privileging a few thousand people in Humpty Doo over tens of thousands in Palmerston and Darwin. And that any dozen grumps could stop any flats, subdivision, development or infill anywhere in the Northern Suburbs because of the tiny numerical margins everyone is on.

Result: no spaces opening up in the existing areas, and no spaces opening up on the fringes. While people continue to pour into Darwin with and for high wages.

Just round the corner from me in Parap is a series of huge apartments and Quest type hotels built recently. Just look round the city to see what is going on, and it isn’t sitting still.

Yes, there are plenty of people working, but the point I made was that we get a very good rate to do so because it is all happening at once.

In addition, there is still development going on in Palmerston. Woods did not stop it dead, nor has he stopped Waddell. Again I say, it is not land release that is the problem, but getting the blocks serviced.

Still, like I said, the present situation suits me fine, and because of the work I am doing, and what I see going up around me, I can’t see that it is anything at all to do with land release at the moment.

And yet the price of all accommodation in Darwin and Palmerston continues to shoot up like a rocket. I suppose it’s the one place in the known universe where the laws of supply and demand don’t apply?

There is massive unmet demand. Yes, there is some new development. There is clearly, going on the underlying price of land, not enough. And the cost of rent and mortgage causes enormous systemic inflation for no visible benefit whatsoever, except to those who were lucky to buy before the early 2000s.

The worst part is that no matter how much gets released in the next few years, it will take years for the effects to unfold. There is, as you are pointing out, the long lead time on installing/upgrading utilities and building new homes/blocks. There’s also the fact that it is much easier for new people to arrive and bid up the slow-growing stock, or for the existing population to receive subsidies which … bid up the slow-growing stock.

The time to have opened up the land market was about a decade ago. If I had a magic wand I’d get the NTG to consider making land inflation targeting — à la the Reserve Bank — a policy objective, possibly even turned over to an independent authority.

One of the problems in the NT is that it is a very small economy. Thus, when a project like Inpex (and before that the Conoco Philips) happen, you get a boost that is a very high percentage of state final product. No matter how fast local building firms build, there is going to be a shortage. This happens not only in the NT, but in other areas where the start up of an industry creates an employment boom – it is not a violation of the laws of supply and demand, rather an example of their applicability.

No-one is stopping developers and builders starting up in Darwin and bidding for the huge tracts of land available in Waddell. Power and Water Corporation has already built a power station there, there is already water headworks available.

I think it might be worth noting that almost every person on Earth lives in accommodation that would not meet minimum legal Australian standards. At least some of your price determination comes from that, rather than from real supply/demand decisions. The buyers are not allowed to buy cheap accommodation and the sellers are not allowed to sell it.

Also, if cheap housing did become available anywhere in Australia that was also near employment, the entire banking system would collapse…